Tenants

Dealing with Tenants with Bad Credit

In today’s post “credit-crunch” economy we are seeing more and more people looking to rent that have some form of bad credit. So, in a society where bad credit is more common than it has ever been should you refuse to work with tenants that have a negative credit history?

A bad credit history may have been caused by a number of things and I don’t think it is a reason to completely discount a potential tenant, especially one that meets all of your criteria.

In this article, we will be discussing the positives and negatives that you have to think about when renting to a tenant with bad credit and we will look at some tips that you may be able to put in place to ensure that the process is a smooth one.

Should You Rent to Bad Credit Tenants?

I am frequently asked whether renting to someone that has a bad credit history is a good idea. Does it make someone less likely to pay rent on time and does it mean that they will not treat your property as well.

The important thing to decipher when dealing with tenants in this position is why they have bad credit. Some tenants will have fallen on tough times; maybe they lost their job or went through a messy divorce. Both of which are valid reasons for having credit issues.

There are however some tenants that just willfully ignore payments, miss deadlines and have defaulted on a number of credit lines. These are the types of tenants you should be looking to avoid.

It also pays to find out if the issue is something as simple as them having no credit history. This can be true of a lot of younger tenants who are given a poor credit score due to the fact that they have no credit history to check against.

We all go through issues and sometimes these issues affect our financial status, starting a fresh, renting a new home and moving on is part of the process to rebuilding your financial standing. So, I think my main point is every case is different and it is important that you get to the bottom of the causes that led to their negative credit.

Positives of Renting to Tenants with Bad Credit

As with anything there are both good points and bad points to dealing with tenants with a bad credit score. You should think about these points carefully before you rent to anyone whose credit score is below the level required to pass a reference.

New Start

A tenant with a bad credit score may be working their way back from a bad situation, perhaps a divorce or a career changing job loss. Tenants with valid reasons for poor credit can sometimes prove to be the best tenants. They are often more cautious of underperforming as tenants and will go out of their way to ensure their commitments are met.

When you are referencing tenants check their credit history and ask them to explain any issues that you find. Perhaps organise a meeting so that you can meet face to face; this will help you to get a better handle on their personality and can lead to you being able to understand their point of view and their history.

May Pay More

Tenants with a poor credit history may be prepared to offer you a higher rate or a larger deposit to compensate for the fact that they are not able to pass references. Be wary of this as they may be covering up for deeper issues, but if you are prepared to take the risk and it comes good you could benefit from a higher rent rate for their time as tenants.

This is something you can negotiate with the tenants and may be something that you should talk over with your broker to ensure you are comfortable with. Take advice from either your broker or PM before committing to anything.

Will Try Harder to Keep You Happy

As with the new start section, it is important to realise that some people are just working back from a bad situation. This can lead to some bad credit tenants becoming amazing renter as they go out of their way to ensure their rental commitments are met.

They will often try harder to keep the property in good order and will be very open to inspections and any changes you may look to make as they will be grateful that you were prepared to give them a chance. This is especially true of tenants that have been rejected by a few landlords in the past due to their situation.

Negatives of Renting to Tenants with Bad Credit

In this section we will look over some of the commonly discussed negatives that should be considered before you commit to any renters with bad credit.

No History

If you are dealing with someone that has no credit history and has therefore failed the credit check you are in a position where you are making a decision based on no information.

In some ways at least dealing with a tenant that has failed their credit check for default or bankruptcy reasons gives you something to go on and means that you can put procedures in place accordingly.

When you have no credit history to go on this means that you cannot make an informed decision as to the way the tenants will perform. Not having information can harm your decision making process and can make it harder for you to decide whether accept the tenants or not.

Insurance

There are multiple, very good insurance products available to landlords that protect them against rent arrears and cover all manner of damages and legal costs. These products can be a real lifesaver for landlords and I would always recommend taking out the relevant insurances to protect your investment.

However the bulk of these companies will refuse to insure tenants that have failed references. This includes tenants with bad credit. This can be a huge issue as it leaves you without the added protect that this type of landlord insurance offers.

Relapse

Poor credit history clearly shows a history of missed payments, be it on loans or credit cards. This is obviously a good indicator of their view on paying bills, etc. on time. Logic would suggest that this gives you a guide to their attitude towards rent commitments.

Even if the credit history is old, you should still be wary of poor credit history as it is fair to assume that a tenant with negative history could release and start to miss payments again. This is obviously problematic as now one of their payments will be your rent.

Tips and Tricks

There are a number of things that you should be looking out for or procedures you should put in place to help you decide whether to go ahead and work with somebody that has failed their credit check. Let’s take a look at some of the things you should think about when confronted by this issue.

Check Current Salary

If the poor credit dates back to a time when they were earning less and simply over committed it is worth checking their current salary and other commitments to get an idea of their monthly outgoings. This will give you an idea whether or not they can really afford the rent they are committing to.

If the bad credit is old and their salary is some way ahead of what it used to be it may well be a non-issue. Finding this out really helps make your decision process easier. Which is obviously your goal.

Ask to See Bank Statements

Similar to a salary check seeing six months of bank statements shows you your prospective tenants current financial status. You can use their bank statements to make an informed decision in relation to their ability or their likelihood of paying your rent on time.

Using their salary and their bank statements gives you the ability to take a view on the way they are spending their earnings and whether or not they have financial commitments that will affect their ability to pay rent on time.

Higher Deposit

If you are unsure, but are keen to move ahead with the tenant you can ask them to pay a higher deposit. I would look to take two months rent to cover any eviction process that you may need to undertake if the tenancy goes wrong.

Any tenants that has bad credit should be understanding of the fact that they will be viewed as far from ideal tenants and should be happy to agree to something as simple as paying a slightly higher deposit. After all if they conduct themselves well and pay rent on time throughout the tenancy they will receive the deposit back at the end of the tenancy anyway.

Find the Reason

I’ve touched on this a number of times, but it is impossible to make an informed decision on whether to proceed or not without getting to the bottom of why the tenant’s credit score is bad. If you feel uncomfortable discussing this with the tenant directly you can have your broker or Property Manager do it for you.

Guarantor or Co-Signer

If you are still unsure whether to work with the tenant or not you always have the option to ask them to provide a guarantor or co-signer. This is somebody who can will guarantee the rent should they miss payments.

Having someone who is responsible for their actions often forces a tenant to ensure they meet their commitments as they will not be keen on putting their guarantor (often their parents) in the position of having to pay for their mistakes.

The guarantor or co-signer will have to be referenced and sign the lease. This offers you a good level of protect as you are also able to take them to court should any rent remain unpaid.

This is a tip I would not negotiate on and whilst I have worked with a number of tenants with bad credit in the past I have always ensured that a guarantor or co-signer is in place to protect my interests.

Conclusion

Working with a tenant that has failed references can be an unnerving, potentially tricky situation. But when handled correctly and when the right procedures; particularly guarantors are put in place you will often find that the tenancy runs smoothly.

Ensure you talk through your concerns with your broker and have all of your worries placated before you agree to a tenancy. Remember if you don’t feel comfortable find a new tenant. All in all I think that dealing with tenants with bad credit shouldn’t be an issue. But it pays to be aware of the risks and potential pitfalls you face when renting to this type of tenant.

Leave a Reply

Your email address will not be published. Required fields are marked *

Did you like the article? Subscribe to our mailing list to receive a weekly newsletter with our new articles and real estate investment updates. You can unsubscribe at any moment. And we will never sell your contact information.

* indicates required

Related Posts